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Bureau of Mines Information Circular/1980 






Mineral Depletion Allowances 
and U.S. Import Dependence 

By Phillip N. Yasnowsky and Annette P. Graham 




UNITED STATES DEPARTMENT OF THE INTERIOR 



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Information Circular 8824 



Mineral Depletion Allowances 
and U.S. Import Dependence 

By Phillip N. Yasnowsky and Annette P. Graham 




UNITED STATES DEPARTMENT OF THE INTERIOR 
Cecil D. Andrus, Secretary 

BUREAU OF MINES 

Lindsay D. Norman, Acting Director 



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Information Circular 8824 

Mineral Depletion Allowances 
and U.S. Import Dependence 

By Phillip N. Yasnowsky and Annette P. Graham 




UNITED STATES DEPARTMENT OF THE INTERIOR 
Cecil D. Andrus, Secretary 

BUREAU OF MINES 

Lindsay D. Norman, Acting Director 



As the Nation's principal conservation agency, the Department of the Interior 
has responsibility for most of our nationally owned public lands and natural 
resources. This includes fostering the wisest use of our land and water re- 
sources, protecting our fish and wildlife, preserving the environmental and 
cultural values of our national parks and historical places, and providing for 
the enjoyment of life through outdoor recreation. The Department assesses 
our energy and mineral resources and works to assure that their development is 
in the best interests of all our people. The Department also has a major re- 
sponsibility for American Indian reservation communities and for people who 
live in Island Territories under U.S. admi 







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This publication has been cataloged as follows: 



Yasnowsky, Phillip N 

Mineral depletion allowances and U.S. import dependence. 

(Information circular — Bureau of Mines ; 8824) 

Includes bibliographies^ 

Supt. of Docs„ no.: I 28-27:8824- 

L Mineralindustries — United States. 2- Mineral industries— Taxation- 
United States- 3- Mining industry and finance— United States- 4- Deple- 
tion allowances— United States- L Graham, Annette P-, joint author- 
IL Title- III- Series: United States- Bureau of Mines- Information 
circular ; 8824- 

AJ4 [HD9506.U62] 622s f336.2'07] 80-607028 



I''iii- s;ilc by lljc Siipcii nlciiilriir of DiicuiiK'nts. U.S. (Jovoriinioiit I'l-iiitiiiK Office 
Wiisiiint'tim. D.C. 20402 



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CONTENTS 









Pase 



Abstract 1 

Introduction 1 

Background 2 

Percentage depletion allowance rate structure 3 

Strategic and critical stockpile materials 3 

Reserves to cumulative demand ratio 5 

Net Import reliance as a percentage of apparent consumption 7 

Conclusion 9 

Hypothetical Illustration of the mineral depletion allowance 9 

Percentage depletion allowance rates 12 

TABLES 

1. Percentage depletion allowance rates applicable to domestic 

production of minerals designated as strategic and critical for 
stockpiling purposes 4 

2. Ratio of U.S. recoverable reserves (1976) to U.S. cumulative demand, 

1976-2000, and percentage depletion allowance rate, selected 

minerals 6 

3. U.S. net Import reliance as a percentage of apparent consumption, 

1978, and percentage depletion allowance rate, selected minerals.. 8 

4. Hypothetical Illustration of the use of the mineral depletion 

allowance 10 

5. Percentage depletion allowance rates for mineral commodities 

(excluding fuels) 13 



MINERAL DEPLETION ALLOWANCES AND U.S. IMPORT DEPENDENCE 

by 

Phillip N. Yasnowsky ^ and Annette P. Graham 1 



ABSTRACT 

This Bureau of Mines report examines the percentage depletion allowance 
rate structure in relation to several criteria that are indicative of U.S. 
mineral import dependence. These criteria are the minerals considered as 
strategic and critical for stockpiling purposes, the ratio of reserves to 
forecast cumulative demand (1976-2000) for selected minerals, and the U.S. net 
import reliance as a percentage of apparent consumption (1978), also for selected 
minerals. In general, it was found that there does exist a direct, although 
not perfect, relationship between the percentage depletion allowance rates and 
the degree of import dependence as indicated by these three criteria. The 
higher percentage rates tend to be associated with those minerals for which 
the United States is, or will likely be, heavily dependent on foreign sources. 

In addition, a basic discussion of the mineral depletion allowance is 
provided, including numerical examples illustrating the computation of the 
allowance under several assumptions. Also, the percentage depletion allowance 
rates for individual minerals are tabulated. 

INTRODUCTION 

This paper has been prepared to provide basic information on the mineral 
(nonfuel) depletion allowance provided in the Internal Revenue Code of 1954 
(Title 26 of the U.S. Code). An allowance for the depletion of natural 
resources is available for timber and minerals. The cost depletion allowance 
applies both to minerals and timber; the percentage depletion allowance is an 
alternative specific to minerals and, thus, of interest to the Bureau of Mines, 
The significance of mineral import dependence is that (1) minerals are the 
foundation of a modern industrial society and (2) the United States is heavily 
dependent on foreign sources for a number of minerals. 



^Economist, Branch of Economic Analysis, Bureau of Mines, Washington, D.C, 



The fact that the United States relies on imports for a sub- 
stantial portion of its mineral requirements should not in itself be 
alarming; however, problems arise when the interests of foreign sup- 
pliers conflict with the United States national security or economic 
interests. ^ 

A recent study by the Congressional Research Service listed a number of 
arguments for and against percentage depletion. Indeed, most references on 
the depletion allowance are either of a supportive or a critical nature. A 
brief history of the depletion allowance is provided for background information. 

BACKGROUND 

The mineral depletion allowance is a provision of the Internal Revenue 
Code of 1954, sections 611-613, that allows mineral producers a deduction in 
computing taxable income for the exhaustion of an asset in the form of a min- 
eral deposit. The concept of depletion (in particular cost depletion) for 
minerals is similar to the depreciation of other assets. 

An allowance for depletion was made part of the tax law in 1913 along 
with the enactment of the Federal income tax, following passage of the 
Sixteenth Amendment to the Constitution, which authorized such a tax. The 
corporation excise tax law of 1909 did not contain any provision for the 
depletion of mineral deposits. Discovery value depletion, which was based on 
the fair market value of the property at the time of discovery or within 
30 days, was first introduced in 1918. Due to the difficulties in administer- 
ing discovery value depletion, a depletion deduction based on a specified per- 
centage of income, or percentage depletion, was provided for oil and gas in 
1926. In 1932, percentage depletion was extended to cover metals, sulfur, and 
coal. The list of minerals allowed the percentage depletion provision was 
extended during subsequent years. The Internal Revenue Code of 1954 now 
lists many minerals specifically but also contains a category of "all other 
minerals." Specifically excluded are "soil, sod, dirt, turf, water, or 
mosses" and "minerals from sea water, the air, or similar inexhaustible 
sources" [Internal Revenue Code of 1954, section 613 (b)(7)]. The applicable 
rates, ranging from 5 to 22 percent, are also specifically listed in the Code. 

It should be noted that the form of a material that is listed in the vari- 
ous tables of this report may differ from the form at which processing stage 
the percentage depletion allowance is applicable. For example, antimony and 
zinc are listed in the tables, but the Internal Revenue Code of 1954 
[section 613 (b) ] refers to "...ores of the following metals: antimony..., 

2U.S. Bureau of Mines. Status of the Mineral Industries. December 1978, p. 13. 
^Tannenwald, Robert. Analysis and Evaluation of Arguments for and Against 

Percentage Depletion. Congressional Research Service, Library of Congress, 

Mar. 22, 1978, 60 pp. 
'^Gravelle, Jane. Percentage Depletion on Hard Minerals. Congressional 

Research Service, Library of Congress, Apr. 7, 1975, 23 pp. 
Staff, Joint Committee on Internal Revenue Taxation. Legislative History of 

Depletion Allowances. Prepared for use of the Committee on Ways and Means. 

March 1950, 36 pp. 



and zinc" as being authorized the 22 percent rate for domestic production. 
The law also states that the "term 'mining' Includes not merely the extraction 
of the ores or minerals from the ground but also" certain described treatment 
processes. Other processes described In the Internal Revenue Code are not 
considered "mining" for purposes of computing the percentage depletion deduc- 
tion. In addition, "mining" can Include "any other treatment process pro- 
vided for by regulations prescribed by the Secretary" of the Treasury which 
is not inconsistent with the specific provisions of the law. The processes 
presently recognized are listed in the Income tax regulations. 

PERCENTAGE DEPLETION ALLOWANCE RATE STRUCTURE 

In this report, the "rationality" of the percentage depletion allowance 
rate structure is briefly examined in relation to three criteria which are 
indicative of U.S. mineral Import dependence. First, the percentage depletion 
rates are related to the mineral commodities considered to be strategic and 
critical for stockpiling purposes. Second, the percentage rates are related 
to data indicating to what degree current U.S. reserves could satisfy pro- 
jected U.S. demand for the rest of the century. The figures indicating this 
are the ratio of reserves (1976) to forecast cumulative demand, 1976-2000, for 
individual minerals. Third, the percentage depletion allowance rates are 
related to data showing the 1978 U.S. net import reliance as a percentage of 
apparent consumption for various mineral commodities. There is some duplica- 
tion of material in the sections dealing with the latter two criteria. This 
is done with the view that each individual section is of sufficient importance 
to be a coherent whole by Itself. 

It might be noted that the establishment of the percentage depletion 
allowance rates was not necessarily done on the basis of Import dependence. 
Research into Congressional intent in establishing the rates was not under- 
taken as part of this effort. In any event, it is not likely that a single 
criterion, such as import dependence, would dictate the rate structure. How- 
ever, mineral import dependence is surely a sufficiently important criterion 
against which to judge, at least partially, the "rationality" of the percent- 
age depletion allowance rate structure. 

Strategic and Critical Stockpile Materials 

Table 1 shows the percentage depletion allowance rates applicable to the 
domestic production of mineral commodities designated as strategic and criti- 
cal for Government stockpiling purposes. The designation of a material as 
strategic and critical does not necessarily mean that the material is actually 
held in the stockpile. The Inventory of a material at any given time may be 
zero either because the goal is zero or, if not, because the goal has yet to 
be fulfilled. There are 93 basic stockpile materials, of which 79 are mineral 
products. Materials can be held in a variety of forms; for example, aluminum, 
alumina, and bauxite are all stockpile materials. Therefore, the 79 mineral 
commodities have been reduced to 33 for this table, the purpose of which is to 
show the percentage depletion allowance rate applicable to some form of the 
basic stockpile materials. Of these 33 mineral products, the percentage deple- 
tion allowance for domestic production is 22 percent for 27, 15 percent for 
two, and 14 percent for the remaining four. 



TABLE 1. - Percentage depletion allowance rates applicable to domestic 
production of minerals designated as strategic and critical 
for stockpiling purposes^ 



Mineral commodity 



Percentage 

depletion 

allowance 



Mineral commodity 



Percentage 

depletion 

allowance 



I 



Aluminum. . 
Antimony. . 
Asbestos . . 
Beryllium. 
Bismuth. . . 
Cadmium. . . 
Chromium. . 

Cobalt 

Columbium. 
Copper. . . . 
Diamond. . . 
Fluorspar. 
Graphite. . 
Iodine. . . . 

Lead 

Manganese. 
Mercury. . . 



22 
22 
22 
22 
22 
22 
22 
22 
22 
15 
14 
22 
22 
14 
22 
22 
22 



Mica , 

Molybdenum , 

Nickel , 

Platinum-group metals. 

Quartz crystals 

Sapphire and ruby 

Silicon , 

Silver , 

Talc, block steatite. 

Tantalum , 

Thorium , 

Tin 

Titanium 

Tungsten , 

Vanadium 

Zinc 



22 
22 
22 
22 
22 
14 
14 
15 
22 
22 
22 
22 
22 
22 
22 
22 



iThere are 93 basic stockpile materials of which 79 are minerals or mineral 
products. Materials are often held in a variety of forms; for example, 
aluminum, alumina, and bauxite are all stockpile materials. This table 
is simplified in that where appropriate, the various stockpile forms are 
combined under the heading of one commodity, in this case, aluminum. The 
form which is listed here may differ from the form at which processing 
stage the percentage depletion allowance is applicable. 

Sources: U.S. Bureau of Mines. Mineral Commodity Summaries. 1979. 

Federal Preparedness Agency, U.S. General Services Administration. 
Stockpile Report to the Congress, April 1978-September 1978. 
April 1979. 

Prentice-Hall, Inc. Federal Tax Guide, Code Volume, Internal 
Revenue Code of 1954. 1977 with updated supplements. 



The purpose of the strategic and critical materials stockpile Is "to pro- 
tect the Nation against a dangerous and costly dependence upon foreign sources 
of supply In time of national emergency.' Therefore, It would be reasonable 
to find the higher percentage depletion rates associated with the minerals 
designated as strategic and critical. In fact, this is the case. The highest 
percentage depletion rate of 22 percent applies to the domestic production of 
82 percent of the basic stockpile materials of mineral origin. Thus, the con- 
clusion is that the percentage depletion allowance rate structure conforms 
reasonably well to expectations in this Instance. 

Reserves to Cumulative Demand Ratio 

The Bureau of Mines publication "Mineral Trends and Forecasts" includes 
data showing the ratio of recoverable reserves, 1976, to cumulative demand, 
1976-2000, for individual metals and mineral forming elements and nonmetalllc 
minerals. Table 2 lists this ratio and the percentage depletion allowance 
rate for those items to which the percentage depletion allowance is applicable 
at some processing stage. Several other commodities Included in "Mineral 
Trends and Forecasts" are not Included In table 2 because several percentage 
depletion allowance rates are applicable to each of the items as they are 
categorized. Also, arsenic and kyanite are omitted from table 2 because a 
reserve to cumulative demand ratio is not available due to the withholding 
of individual company data. Finally, it should be noted once again that the 
commodity listed does not necessarily conform to the one at which processing 
stage the percentage depletion allowance is applicable. 



^Federal Preparedness Agency, U.S. General Services Administration. Stockpile 
Report to the Congress, April 1978-September 1978. April 1979, p. 1. 



TABLE 2. - Ratio of U.S. recoverable reserves (1976) to U.S. cumulative demand, 1976-2000, 
and percentage depletion allowance rate, selected minerals 1 2 



Commodity 



Ratio of 

recoverable 

reserves, 1976, 

to cumulative 

demand, 1976-2000 



Percentage 

depletion 

allowance 

(domestic 

production) 



Commodity 



Ratio of 

recoverable 

reserves, 1976, 

to cumulative 

demand, 1976-2000 



Percentage 

depletion 

allowance 

(domestic 

production) 



Aluminum 

Antimony 

Asbestos 

Barite. . 

Beryllium 

Bismuth. 

Boron. . . 

Bromine. 

Cadmium. 

Cesium. . 

Chromium 

Cobalt. . 

Columbium 

Copper. . 

Corundum 

Diatomite 

Feldspar 

Fluorine 

Garnet. . 

Germanium 

Gold 

Graphite 
Gypsum. . 
Hafnium. 
Indium. . 
Iodine. . 
Iron in ore 
Lead .... 
Lime .... 
Lithium. 
Manganese 
Mercury. . 
Mica, scrap 
and flake. 
Mica, sheet 



<0 



1 
.1 
.2 
1.3 
3.1 
.3 
,4 







4 

>10 

1 



<.l 
^0 


1.5 

>10 
>10 

.1 
1.1 

.6 

.6 


.8 
>10 

.4 
1.8 
1.5 



>10 








22 
22 
22 
14 
22 
22 
14 
5 
22 
14 
22 
22 
22 
15 
22 
14 
14 
22 
14 
14 
15 
22 
14 
22 
14 
14 
15 
22 
14 
22 
22 
22 

22 
22 



Molybdenum 
Nickel . . . 
Palladium 
Peat. . . 
Perlite 
Phosphate 

rock. . . 
Platinum 
Potash. . 
Pumice. . 
Rhenium. 
Rhodium. 
Rubidium 

Salt 

Sand and 

gravel. 
Selenium 
Silicon. 
Silver. . 
Soda ash 
Strontium 
Sulfur.-. 

Talc 

Tantalum 
Tellurium 
Thallium 
Thorium. 

Tin 

Titanium 
Tungsten 
Vanadium 
Vermiculite 

Zinc 

Zirconium 



2.9 
<.l 

>10 



3.6 




7 
>10 


A 



A 

1.9 
>10 

.4 
>10 

.5 
,3 



4, 


1.9 
4.9 
>10 

.1 
1.4 

.4 

.2 
10.0 

.6 
2.0 



22 
22 
22 
5 
10 

14 
22 
14 
5 
14 
22 
14 
10 



14 
14 
15 
14 
22 
22 
+14 
22 
14 
14 
22 
22 
22 
22 
22 
14 
22 
22 



< Denotes less than. > Denotes greater than. A Adequate. 

■^The form of material which is listed here may differ from the form at which processing 

stage the percentage depletion allowance is applicable. 
^Arsenic and kyanite are omitted because the demand data are withheld to avoid disclosing 

individual company data. Clays, magnesium, rare-earth minerals and yttrium, and stone 

are omitted because several percentage depletion allowance rates are applicable to each 

of these categories. 
■"Common varieties. 
Excluding block steatite. 

Sources: U.S. Bureau of Mines. Mineral Commodity Summaries. 1979. 

U.S. Bureau of Mines. Mineral Trends and Forecasts. 1979. 

Prentice-Hall, Inc. Federal Tax Guide, Code Volume, Internal Revenue Code of 
1954. 1977 with updated supplements. 



The data in table 2 have been used to prepare the following frequency dis- 
tribution relating the various percentage depletion allowance rates to ranges 
of the reserves to cumulative demand ratios. The numbers in the matrix are 
the number of mineral commodities in each category. 



Reserves to 




Percentage depletion 




cumulative 






allowance rate 




demand ratio 


5 


7.5 


10 


14 


15 


22 


Total 














2 





11 


13 


>0- 2 











9 


4 


17 


30 


>2- 4 











1 





3 


4 


>4- 6 











3 








3 


>6- 8 


1 

















1 


>8-10 








1 


1 








2 


>10 or adequate 


3 





1 


6 





3 


13 


Total 


4 





2 


22 


4 


34 


66 



> Denotes greater than. 



The reserves (1976) to forecast cumulative demand (1976-2000) ratio pro- 
vides an indication of the degree of mineral import dependence for individual 
commodities that can be expected during the rest of the century. If the rate 
structure were based on the reserves to cumulative demand ratio, the higher 
rates of percentage depletion would correspond to the lower ratios and vice 
versa. As shown by the data, the correspondence is not perfect, but there is 
a tendency for the data to conform to such a relationship. The greatest vari- 
ability is in the 14 percent percentage depletion allowance rate category, 
which can be explained by the fact that this is the rate applicable to "all 
other minerals." 

Net Import Reliance as a Percentage of Apparent Consumption 

The basic data for examining the third criterion, net import reliance^ as 
a percentage of apparent consumption, of a "rational" percentage depletion 
allowance rate structure are shown in table 3. Some commodities are not 
Included in table 3 because several percentage depletion allowance rates are 
applicable to each commodity as they are categorized in the original source of 
the net import reliance data, "Mineral Commodity Summaries." Furthermore, 
some other commodities are omitted because the data are withheld to avoid dis- 
closing individual company data. Also, the commodity listed does not neces- 
sarily conform to the one at which processing stage the percentage depletion 
allowance is applicable. 



^Net import reliance = imports - exports + adjustments for government and 
industry stock changes. 



TABLE 3. - U.S. net import reliance as a percentage of apparent consumption, 1978, 
and percentage depletion allowance rate, selected minerals 1 2 



Commodity 



Net import 
reliance as 
a percentage 
of apparent 
consumption 



Percentage 

depletion 

allowance 

(domestic 

production) 



Commodity 



Net import 
reliance as 
a percentage 
of apparent 
consumption 



Percentage 

depletion 

allowance 

(domestic 

production) 



Antimony. , . . 
Asbestos. . . , 

Barite 

Bauxite and 

alumina. . . . 

Boron 

Bromine 

Cadmium 

Cesium 

Chromium. . . , 

Cobalt , 

Columbium. . . 

Copper , 

Corundum. . . , 
Diamond, 

industrial, 
Diatomite. . , 
Feldspar. . . , 
Fluorspar. . , 
Gem stones . . 
Germanium. . , 

Gold 

Gypsum , 

Ilmenite . . . , 
Iron ore. . . , 
Kyanite and 

related 

minerals . . . 

Lead , 

Lime , 

Lithium. . . . , 
Manganese. . , 
Mercury. . . . . 



48 
84 
40 

93 

E 

E 

66 
100 

92 

97 
100 

19 
100 

100 
E 
E 

82 
99 
12 
54 
34 
39 
29 



E 
11 
2 
E 
98 
57 



22 
22 

14 

22 
14 
5 
22 
14 
22 
22 
22 
15 
22 

14 
14 
14 
22 
14 
14 
15 
14 
22 
15 



22 
22 
14 
22 
22 
22 



Mica, sheet. . . 
Mica, scrap 

and flake .... 
Molybdenum. . . . 

Nickel 

Peat 

Phosphate rock 
Platinum-group 

metals 

Potash 

Pumice and 

volcanic 

cinder 

Salt 

Sand and 

gravel 

Selenium 

Silicon 

Silver 

Sodium 

carbonate .... 
Sodium sulfate 

Strontium 

Sulfur 

Tantalum 

Thallium 

Tin 

Tungsten 

Vanadium 

Vermiculite, 

crude 

Zinc 



100 

E 
E 
77 
32 

E 

91 
61 



5 
9 

E 

61 
18 
41 

E 
3 
100 
10 
97 
20 
81 
50 
27 

E 
62 



22 

22 
22 
22 
5 
14 

22 
14 



5 
10 

5 
14 
14 
15 

14 
14 
22 
22 
22 
14 
22 
22 
22 

14 
22 



E Denotes net exports. 

^The form of material which is listed here may differ from the form at which pro- 
cessing stage the percentage depletion allowance is applicable. 

^Some mineral commodities, for example, arsenic and graphite, are omitted because 
the data are withheld to avoid disclosing individual company data. Also, several 
mineral commodities, for example, clays and magnesium, are omitted because sev- 
eral percentage depletion allowance rates are applicable to each category 
(see table 5) . 



Sources: U.S. Bureau of Mines. Mineral Commodity Summaries. 1979. 

Prentice-Hall, Inc. Federal Tax Guide, Code Volume, Internal Revenue Code 
of 1954. 1977 with updated supplements. 



The following frequency distribution relating net import reliance to the 
various percentage depletion rates has been prepared from table 3. The numbers 
in the matrix refer to the number of mineral commodities in each category. 



Net import reliance 
as a percentage of 
apparent consumption 



>75-100 

>50- 75 

>25- 50 

>0- 25 

Net exports, 

Total 



Percentage depletion 
allowance rate 



7.5 



10 



14 



18 



15 



22 



14 
3 

4 
2 

4 



27 



Total 



17 

6 

9 

10 

12 



54 



> Denotes greater than. 

Once again, the data do not indicate a perfect relationship between the 
import dependence criterion and the percentage depletion allowance rates, but 
there is a tendency for the higher percentage rates to be associated with a 
higher degree of import reliance. For example, for 17 of the 27 mineral 
commodities receiving the 22 percent depletion allowance rate, the United 
States is dependent on foreign sources for more than 50 percent of its consump- 
tion. Alternatively, 15 of the 22 mineral commodities for which the United 
States is 25 percent or less dependent on foreign sources are entitled to an 
allowance of 14 percent or less. 

Conclusion 

The percentage depletion allowance rate structure has been examined in 
relation to three criteria that are indicative of U.S. mineral import depen- 
dence. It might be noted that these relationships are put forth for informa- 
tional purposes only. It is not likely that any single criterion can be the 
basis for a "rational" rate structure for the depletion allowance. 

The data in this paper show that there does exist some correspondence 
between each of the three criteria and the depletion allowance rates. The per- 
centage depletion allowance rate structure, to a certain extent then, is con- 
sistent with the goal of a secure mineral supply position. Thus, the basic 
conclusion is that there is a degree of "rationality" in the percentage depletion 
allowance rate structure when viewed from the perspective of import dependence. 

HYPOTHETICAL ILLUSTRATION OF THE MINERAL DEPLETION ALLOWANCE 

There are currently two methods of depletion computation authorized by 
Federal tax law: cost depletion and percentage depletion. The taxpayer is 
required to use the method of computation that results in the greater allowance. 
Table 4 provides a simplified arithmetical illustration of how the depletion 
allowance works under certain assumptions. It is emphasized that this table is 
for illustrative purposes only and cannot be used to assess impacts or the impor- 
tance of the tax law provisions or changes in these provisions. The caveat is 
offered mainly for two reasons in addition to the arbitrary use of numbers in 
the examples. First, the alternative tax strategies available to the taxpayer 
are not considered. Second, the financial circumstances of individual tax- 
payers or even groups of taxpayers are likely to differ. 



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Cost depletion, which is based on actual cost, is the method of depletion 
that is most clearly comparable with depreciation. The annual deduction for 
cost depletion is computed by dividing the cost basis (as adjusted) by the 
estimated reserves and then multiplying this figure by the annual sales. This 
deduction continues until the cost basis is reduced to zero. 

The percentage depletion allowance allows mineral producers to deduct a 
certain percentage, between 5 and 22 percent depending on the mineral and loca- 
tion (domestic or foreign) , of the value of mineral production in computing 
taxable income from a mineral property. The deduction is subject to a limita- 
tion of 50 percent of taxable income, computed without consideration of the 
depletion allowance. The significance of percentage depletion is that the 
deduction is based on production and does not necessarily bear any relation- 
ship to the amount invested. 

Column 1 of table k shows the operation of percentage depletion when a 
full deduction of 15 percent of gross income is taken. The 15 percent rate is 
the rate applicable to the domestic production of copper, gold, iron ore, and 
silver. The data in this column are taken directly from O'Neil's article"^ 
which deals with copper. 

Column 2 calculations are made under the assumption that the deduction for 
depletion is eliminated. The data from column 1 are used with this exception. 

Column 3 uses the same data as columns 1 and 2, except that a deduction 
for cost depletion is incorporated into the calculations. The cost depletion 
deduction is obtained as follows: 

Cost depletion: Purchase price (includes all capitalized expenditures) 
= $3.2 million. 

Estimated ore reserves on date of purchase = 15.5 million tons. 

Sales during year = 1.9 million tons. 

„ ^ J T ^. ^ purchase price $3.2 million 

Cost depletion per ton = ^ ^ = ttv ttt: 

reserves 15.5 million tons 

= $0,206. 

Annual cost depletion deduction = tons sold X per ton rate 
= 1.9 million tons X $0,206 = $391,000, or rounded to $390,000. 

The cost depletion deduction for the following year would be obtained using 
the adjusted cost basis figure of $2.8 million ($3.2 million minus $390,000) 
and the adjusted reserve figure of 13.6 million tons (15.5 million tons minus 
1.9 million tons). The per ton cost depletion figure would be 

$2.8 million ^ $0,206, 

13.6 million tons 

^O'Neil, Thomas J. The Minerals Depletion Allowance: It's Importance in 
Nonferrous Metal Mining. Mining Engineering, October 1974, pp. 61-64. 



12 



which is the same figure as for the first year because both the cost basis and 
the reserve figure have been adjusted only due to the previous year's deple- 
tion deduction and sales, respectively. The cost depletion per unit figure 
would change if, for example, a new reserve estimate became available or the 
cost basis were adjusted for some reason other than the depletion deduction, 
such as a capitalized expenditure. 

Column 4 shows how the 50 percent of taxable income limitation works. 
The operating cost figure was arbitrarily increased to $10 million to reduce 
net income before taxes and depletion. The depletion deduction is thus 
$1.5 million (50 percent of net income of $3 million) instead of the $2.25 mil- 
lion allowed under the conditions assumed in column 1. 

The figures in column 5 show the situation when the net income before 
taxes and depletion is reduced to zero. The operating cost figure was arbi- 
trarily increased to $13 million to achieve this net income figure. 

PERCENTAGE DEPLETION ALLOWANCE RATES 

Table 5 shows the percentage depletion allowance rates applicable to 
specific mineral commodities (excluding fuels) for domestic and foreign pro- 
duction. The mineral commodity listing basically follows that found in the 
Bureau of Mines annual "Mineral Commodity Summaries." Several important min- 
eral commodities, such as aluminum, cement, and lime, are not included in 
table 5, but the raw materials from which they are made are listed. 

The percentage depletion allowance rates range from 5 to 22 percent, 
depending on the commodity and location (domestic or foreign) . Some mineral 
commodities have more than one applicable rate depending on the specific form 
or use of the material. For example, clay for drainage and roofing tile has 
a rate of 5 percent, and clay for alumina is given a rate of 22 percent. The 
percentage rates for foreign production are generally lower than those appli- 
cable to domestic production. A tabulation of the number of commodities at 
each rate for domestic and foreign production follows. 



Rate, 


Frequency 


percent 


Domestic 


Foreign 


5 

7.5 

10 

14 

15 

22 


8 
1 
3 

30 
4 

39 


8 
1 
4 
71 

1 


Total 


85 


85 



13 



TABLE 5 . - Percentage depletion allowance rates for mineral commodities (excluding fuels) 



Mineral commodity 



Percentage rate 



Domestic 



Foreign 



Mineral commodity 



Percentage rate 



Domestic 



Foreign 



Antimony 

Arsenic 

Asbestos 

Barite 

Bauxite 

Beryllium 

Bismuth 

Boron (borax) 

Bromine (brine wells).... 

Cadmium 

Cesium 

Chromium 

Clays: 

Kaolin, ball clay, 

bentonite, fuller's 

earth, and fire clay. . 
Clay and shale for sewer 

pipe or brick, and 

lightweight aggregates 
Clay for alumina or 

aluminum compounds .... 
Clay for drainage and 

roofing tile, etc 

Cobalt 

Columbium 

Copper 

Corundum 

Diamond (industrial) 

Diatomite 

Feldspar 

Fluorspar 

Game t 

Gem stones 

Germanium 

Gold 

Graphite 

Gyspum 

Hafnium 

Ilmenite 

Indium 

Iodine 

Iron ore 

Kyanite 

Lead 

Lithium 

Magnesium and magnesium 
compounds : 

Brucite 

Dolomite and magnesium 

carbonate 

Magnesium chloride 

Olivine 



22 
lA 
22 
14 
22 
22 
22 
14 
5 
22 
14 
22 



14 



7.5 



22 

5 
22 
22 
15 
22 
14 
14 
14 
22 
14 
14 
14 
15 
22 
14 
22 
22 
14 
14 
15 
22 
22 
22 



10 

14 

5 

22 



14 
14 
10 
14 
14 
14 
14 
14 
5 
14 
14 
14 



14 



7.5 



14 

5 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 



10 

14 

5 

14 



Manganese 

Mercury , 

Mica: 

Scrap and flake 

Sheet , 

Molybdenum , 

Nickel , 

Peat , 

Perlite , 

Phosphate rock 

Platinum-group metals . . . . 

Potash 

Pumice 

Quartz crystal, 

electronic grade 

Rare-earth minerals and 
yttrium: 

Monazite 

Other 

Rhenium 

Rubidium , 

Rutile 

Salt (sodium chloride).., 
Sand and gravel: 

Common varieties , 

Quartz sand or pebbles , 

Selenium 

Silicon: 

Quartzite 

Gravel 

Silver 

Sodium carbonate 

Sodium sulfate 

Stone: 

For riprap, ballast, 
road material, etc.... 

Other 

Strontium 

Sulfur 

Talc: 

Block steatite 

Other 

Tantalum , 

Tellurium 

Thallium 

Thorium , 

Tin 

Tungsten 

Vanadium 

Vermiculite , 

Zinc 

Zirconium 



22 
22 

22 
22 
22 
22 

5 
10 
14 
22 
14 

5 

22 



22 
14 
14 
14 
22 
10 

5 
14 
14 

14 
5 
15 
14 
14 



5 
14 
22 
22 

22 
14 
22 
14 
14 
22 
22 
22 
22 
14 
22 
22 



14 
14 

14 
14 
14 
14 

5 
10 
14 
14 
14 

5 

14 



14 
14 
14 
14 
14 
10 

5 
14 
14 

14 
5 
14 
14 
14 



5 
14 
14 
22 

14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 



^The form of material which is lis 
stage the percentage depletion 



ted here may differ from the form at which processing 
allowance is applicable. 



Sources: U.S. Bureau of Mines. Mineral Commodity Summaries, 1979. 

Prentice-Hall, Inc. Federal Tax Guide, Code Volume, Internal Revenue Code 
of 1954. 1977 with updated supplements. u.s. government printing office : i98o o ■ 



325-9B8 






















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